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C O N F I D E N T I A L SECTION 01 OF 03 SANAA 001976
SIPDIS
E.O. 12958: DECL: 07/23/2015
TAGS: PGOVPRELPINRPHUMECONEINVENRGKMPIYMECONCOMENERGY
SUBJECT: REMOVAL OF FUEL SUBSIDIES SPARKS RAPID INFLATION,
RIOTS
REF: A. SANAA 1959
¶B. SANAA 1875
¶C. SANAA 1877
Classified By: CDA Nabeel Khoury for reasons 1.4 b and d.
¶1. (C) Summary. On July 23, Rioting and unrest had abated,
following a weekend of explosive demonstrations against the
lifting of fuel subsidies. On July 23, the ROYG confirmed 22
people killed, but the number is reportedly closer to 40.
Demonstrators lashed out against the ruling elite across
Yemen, angered by government corruption and the rising cost
of living. A brief crisis involving a Hunt Oil facility in
the Mareb region has been resolved. ROYG policy on lifting
fuel subsidies is now at the center of political debate, with
opposition parties accusing security forces of using harsh
tactics against demonstrators and the press. Rumors
regarding imminent Cabinet changes continue, while the ROYG
attempts to justify the policy decision to Yemenis.
International observers welcomed the removal of subsidies, a
severe impediment to Yemen,s economic development, but
expressed disappointment at the ROYG's failure to prepare the
public. There is additional concern that the additional
revenue will not be used effectively to spur economic
development and create jobs. End summary.
---------------------
Calm Returns to Yemen
---------------------
¶2. (SBU) A sense of calm has returned to the streets of Sanaa
after a weekend of riots and unrest. On July 20, angry
demonstrators in Sanaa reacted to sharp price hikes caused by
the ROYG's decision to lift the fuel subsidy, barricading
most major streets, lighting tire fires, and converging on
Government buildings (ref A). Similar demonstrations took
place in Sa'ada, Mareb, Aden, Taiz, Hodeidah, as well as
other parts of the country. The Government acknowledged the
death of 22 people including six policemen, and 375 injuries
including 255 security personnel, but other sources report
higher casualty figures. Poor weather and military
reinforcements helped bring the protests under control in
Sanaa by July 22.
-------------------------------------------
Hunt Facility is Free, Fuel Remains Hostage
-------------------------------------------
¶3. (C) Other parts of the country appear less secure. The
GPC website, al-Muatamarnet, reported that on July 22,
tribesmen from Mareb surrounded the Jana Hunt oil refinery
and disrupted transport from the site (septel). The seige
has ended, but the Mareb-Sanaa road remains blocked,
preventing diesel and propane deliveries to Sanaa. Ralph
Gonzales, head of Hunt security, confirmed that President
Saleh would visit the region shortly to negotiate an end to
the standoff with tribal sheikhs. If a solution is not
reached, said Gonzales, Hunt will be forced at great expense
to cease production, denying the capital of critical fuel
supplies. There are reports of continued protests in Mareb,
al-Jawf, and elsewhere, but for the time being they remain
peaceful.
-------------------------------
Class Warfare, Attacks on Press
-------------------------------
¶4. (C) The unrest in Sanaa appeared spontaneous and
uncoordinated. Many of the rioters were reportedly young
boys caught up in the anarchic spirit. Any symbol of wealth
and influence served as a focus for demonstrations,
regardless of party or tribal affiliation. Mobs attacked the
Ministries of Oil and Finance, as well as the offices of
Sabafon, owned by Yemen's premier sheikh, Abdullah al-Ahmar.
Demonstrators ransacked the International Bank of Yemen,
mistaking it for the World Bank. Angry protestors threw
rocks at passing cars, assuming that anyone wealthy enough to
afford gas was part of the corrupt elite responsible for
their hardship. Yemenis on the street were both saddened by
the riots and angry with the ROYG for its lack of compassion.
"I can't believe how my people are destroying the country,"
said one Yemeni. He then qualified, "But you must understand
why the people are so angry."
¶5. (C) Several sources report a harsh crackdown on
journalists covering the unrest. An al-Jazeera TV team was
reportedly assaulted by security forces, and two of its crew
detained. The ROYG banned correspondents from satellite
channels from covering the events, and transmission of all
footage was also banned. There were other reported incidents
concerning journalists from the independent al-Ayyam
newspaper, the Nasserite weekly al-Wahdawi, the Yemen Times
and al-Khaleej.
---------------
Heads Will Roll
---------------
¶6. (C) The price hike was a severe shock to all but the most
wealthy Yemenis. The cost of diesel rose from 17 YR per
liter (approximately nine US cents) to 45 YR (23 US cents);
gasoline jumped from 35 YR (18 US cents) to 65 YR (34 US
cents); and kerosene and butane, used for cooking, showed
similar increases. Widespread price gouging by
small-business owners made matters worse. Taxi fares costing
300 YR (1.50 USD) on Tuesday shot up to 2000 YR (10.36 USD)
by Wednesday, far exceeding the average rise in fuel prices.
Seeing an opportunity for quick profits, stores doubled and
even tripled prices on nearly every consumer item. The ROYG
and business leaders reached an agreement on July 19 in which
both sides promised to take legal and disciplinary measures
against those who sought to exploit the situation, but it had
little effect. Coupled with an inflation rate hovering
around fifteen percent and a highly unstable currency
exchange, Wednesday's inflationary shock was simply too much
for many Yemenis to bear (ref B).
¶7. (C) Political fallout from the decision has only just
begun, but it is likely that the riots will mark an end to
the careers of a number of prominent ministers. Much of the
demonstrators' anger was directed at Prime Minister Bajammal
and the London based Arab weekly al-Quds al-Arabi reports
that he is planning to flee Yemen. The fate of Finance
Minister Salami remains similarly in question (ref A).
Opposition parties issued a joint statement denouncing the
riots, but calling on the ROYG to rescind the "unjust
measures" immediately. MP Hamid al-Ahmar, son of Sheikh
Abdullah, also condemned the ROYG's decision to lift
subsidies. Although calling for calm and condemning violent
protestations, the opposition Islah party accused the ROYG of
issuing "shoot to kill" orders to security forces, despite
Government claims of restraint.
---------------------------
Long-Run Benefit to Yemenis
---------------------------
¶8. (SBU) The pressure to lift fuel subsidies dates back to a
1995 agreement with the IMF in which Yemen agreed to a
package of economic reforms, including a reduction of
subsidies, in return for financial assistance. According to
the IMF, fuel subsidies cost the ROYG approximately six
percent of GDP in 2004. The cost was projected to rise in
2005 to as much as 700 million USD as a result of rising
world oil prices. In addition, the subsidies led to a rent
economy that allowed military officers and others to benefit
from smuggling fuel. Total annual loss to the economy may
have been over a billion USD. In recent years, declining GDP
growth, a growing budget deficit, and diminishing oil
reserves have made the development of a secure revenue base
more urgent (ref C).
¶9. (SBU) On July 19, the ROYG issued a list of benefits
Yemenis will derive from the reduction of fuel subsidies.
The Government promised to expand social insurance to 200,000
additional citizens, channel revenue to welfare projects at
the Social Fund for Development and Public Works, and to
construct a natural gas pipeline from Mareb to Aden and
Hodeidah to upgrade power stations. The ROYG promised to
protect existing subsidies for water, sanitation and
electricity, as well as to protect domestic industries such
as fishing and cotton production. The plan also included
measures to reduce government expenditures on diplomatic
representation and official travel.
¶10. (C) At the outbreak of the riots, ROYG reaction was
generally terse and unapologetic. The Prime Minister blamed
violence on conspirators, while Minister of Civil Service
al-Sufi was quoted on al-Jazeera, saying the killing of
protestors was "a natural reaction" by the security forces.
In the days that followed, however, ROYG public statements
became more conciliatory, seeking to explain the benefits of
the move to the public. The revenue will, "lift six million
people out of poverty," said al-Sufi. Minister of
Agriculture Suwaid added, "The new price policy will
dramatically reduce water consumption," by forcing Yemenis to
conserve diesel-powered irrigation in agriculture.
--------------------------------------------- ---
Comment: Lack of Trust Between ROYG and Yemenis
--------------------------------------------- ---
¶11. (C) Lifting fuel subsidies was essential for long-term
economic health. The World Bank and others have long
advocated the gradual introduction of such changes to prevent
sudden inflationary shock and civil unrest. After delaying
action for several years, the ROYG finally bit the bullet,
but there appears to have been almost no strategic plan for
implementation. By announcing a dramatic lift in fuel
subsidies at 9:00 pm to go into effect at midnight, the ROYG
sparked an inflationary panic that caused hysteria throughout
the country. In the months leading up to the decision, the
ROYG took no ownership of the reform package, repeatedly
shifting responsibility to Parliament and denying that any
price hikes were planned. The Cabinet did nothing to prepare
Yemenis for the changes, nor did it explain the future
benefits of increased revenue. Few Yemenis understand the
link between these programs and fuel subsidies, and those
that do have little faith that the ROYG will deliver. The
ROYG's policy explanations that followed the riots were too
little too late, and their first explanation - adjustments to
world oil prices - was not credible. Corruption and
mismanagement have severely undermined the Government's
credibility, and many Yemenis believe that officials will
simply pocket the new revenue. For the moment, Yemenis seem
unwilling to make sacrifices for a government they do not
trust. End comment.
Khoury